Policies to Contain Cost and Ensure Fiscal Sustainability
Improve Medicare Advantage Payments.
Medicare currently overpays private plans by 14 percent on average to provide the same benefits as the traditional program – and much more in some areas of the country. The Medicare Advantage program has also done little to reward quality. Moreover, plans have gamed the payment system in ways drive up the public cost of the program. All of this is why Medicare Advantage has become a very profitable line of business for some of the nation’s largest health insurers. The Senate bill created a bidding model for payment rates and phased in changes to limit potential disruptions for beneficiaries. The House bill phased payments down based on local fee-for-service costs.
The final health reform legislation represents a compromise between the House and Senate bills, blending elements of both bills, while providing greater certainty of cost savings by linking to current fee-for-service costs. Specifically, the legislation creates a set of benchmark payments at different percentages of the current average fee-for-service costs in an area. It phases these benchmarks in gradually in order to avoid disruption to beneficiaries, taking into account the relative payments to fee-for-service costs in an area. It provides bonuses for quality and enrollee satisfaction. It adjusts rebates of savings between the benchmark payment and actual plan bid to take into account the transition as well as a plan’s quality rating: plans with low quality scores receive lower rebates (i.e., can keep less of any savings they generate). The legislation requires a payment adjustment for unjustified coding patterns in Medicare Advantage plans that have raised payments under risk adjustment more rapidly than the evidence of their enrollees’ health status and costs suggests is warranted, based on actuarial analysis.
Health reform also includes a new policy that will require Medicare Advantage plans to spend at least 85% of revenue on medical costs or activities that improve the quality of care rather than excessive executive compensation and other unjustified overhead costs. Lastly, it eliminates the comparative cost adjustment program that has not yet been implemented and would cost $100 million.
Delay and Reform the High-Cost Plan Excise Tax.
Part of the reason for high and rising insurance costs is that insurers have little incentive to lower their premiums. That is why health reform includes a tax on health insurers offering the highest-premium health care plans. CBO has estimated that this policy will reduce premiums as well as contribute to long-run deficit reduction. The health care legislation changes the effective date of the Senate policy from 2013 to 2018 to provide additional transition time for high-cost plans to become more efficient. It also raises the amount of premiums that are exempt from the assessment from $8,500 for singles to $10,200 and from $23,000 for families to $27,500 and indexes these amounts at general inflation plus 1 percent for 2019, and general inflation thereafter. To the degree that health costs rise unexpectedly quickly between now and 2018, the initial threshold would be adjusted upwards automatically. To ensure that the tax targets the plans with the most generous benefits rather than simply plans with high costs, the legislation includes an adjustment for firms whose health costs are higher due to the age or gender of their workers, no longer counts dental and vision benefits as potentially taxable benefits, and includes a permanent adjustment in favor of high-risk occupations such as “first responders.”
Broaden the Medicare Hospital Insurance (HI) Tax Base for High-Income Taxpayers.
Under current law, people who earn a salary pay the Medicare HI tax on their earned income, but those who have substantial unearned income do not, raising issues of fairness. The final legislation adopts the Senate bill approach and adds a 3.8 percent assessment (equal to the combined employer and employee share of the existing HI tax) on income from interest, dividends, annuities, royalties and rents, other than such income which is derived in the ordinary course of a trade or business which is not a passive activity (e.g., income from active participation in S corporations) on taxpayers with respect to income above $200,000 for singles and $250,000 for married couples filing jointly. The additional revenues from the tax on earned income would be credited to the HI trust fund and the revenues from the tax on unearned income would be credited to the Supplemental Medical Insurance (SMI) trust fund.
Increase in Fees on Brand Name Pharmaceuticals.
As more Americans gain health insurance, more will be able to pay for prescription drugs. Moreover, health reform closes the Medicare “donut hole,” ensuring that seniors do not skip or cut back on needed prescriptions. Both policies will result in new revenue for the pharmaceutical industry. The legislation raises $27 billion from an assessment on this industry. It also delays the implementation of the assessment by one year, until 2011, and makes changes to facilitate administration by the IRS.
Close Tax Loopholes.
The final health care legislation includes two provisions originally in the House bill to close tax loopholes: (1) Current law provides a tax credit for the production of cellulosic biofuels. The credit was designed to promote the production and use of renewable fuels. Certain liquid by products derived from processing paper or pulp (known as “black liquor” when derived from the kraft process) were not intended to be covered by this credit. The final legislation adopts the House bill’s policy to clarify that they are not eligible for the tax credit. (2) Health reform helps prevent unjustified tax shelters by clarifying the circumstances under which transactions have “economic substance” (as opposed to being undertaken solely to obtain tax benefits) and raises the penalties for transactions that lack economic substance.